Ignoring a tax liability is never a good idea. If you don’t have the money to pay the IRS, consider using a credit card or asking for more time.
By Kelly Phillips, Erb of Forbes.com
The good news for taxpayers? More than half of us didn’t owe taxes for the last tax year on record. The bad news for taxpayers? The other half of us did.
We hope that, if you fall in the latter category this year, the amount that you owe isn’t too bad. But if it’s more than you counted on, don’t panic and do something to make it worse. Instead, take a deep breath and consider these options for paying your taxes if you don’t have the cash:
Put it on your credit card
I’m generally not a fan of replacing one debt with another. But if your ability to pay is a timing issue — as opposed to a “I simply don’t have it” issue — you can pay your federal income taxes by credit card. The Internal Revenue Service accepts all major cards (American Express, Discover, MasterCard or Visa).
To make a payment, go to the payment page on the IRS web site and choose one of the payment processors to pay by phone. The IRS doesn’t charge a fee for credit card payments, but the processing companies do (the amounts vary from 1.88% to 2.35%; those amounts are a bit different for those taxpayers who e-file). Note that if you’re paying more than $100,000 by credit card (yowza), the IRS advises that the payment “may require special coordination with the service provider you choose.”
Refinance your home
Again, I’m generally not a fan of replacing one debt with another but even the IRS will recommend a refi on occasion. And why not? If you have equity, using that equity to resolve your outstanding tax debt may make sense.
Mortgage rates are low and, unlike credit card interest, you can deduct home mortgage interest on your income taxes if you itemize. This is a big step — make sure that you can afford it first — but converting usable assets into usable resources can pay off. Folks use refis to take vacations, upgrade kitchens and pay off credit cards and student debt. Why not pay your taxes?
Enter into an installment agreement
If you can’t pay your tax debt all at once, you can apply for an installment agreement with the IRS. And these days, it couldn’t be easier: You don’t even have to speak with a real person. You can apply for an installment agreement online if you owe $50,000 or less in combined individual income tax, penalties and interest and you’ve filed all of your tax returns (if you haven’t filed your returns, you’ll have to do that before you can sign up for an installment agreement).
Consider an ‘Offer in Compromise’
An OIC allows you to settle your tax debt for less than the full amount you owe. The IRS considers a host of circumstances including the ability to pay, income, expenses and asset equity. Generally, the IRS will agree to an OIC only if officials determine they will not be able to collect the amount due within a reasonable period of time. That means that they turn down most offers (anecdotally, up to about 80% of offers tend to be rejected).
As with the installment agreement, you must be current with all filing and payment requirements, and you are not eligible if you are currently in an open bankruptcy proceeding. There’s a fee associated with the OIC so if you’re not sure if you’re eligible, check out the IRS’ Pre-Qualifier.
Ask for more time
If you just need a little additional time to pay your tax, you can request it using the Online Payment Agreement application or by calling 800-829-1040. If your circumstances warrant, you could be granted an additional 60 to 120 days to pay the tax in full; if that happens, you generally will pay less in penalties and interest.
Help is available. However you choose to resolve your debt, don’t simply ignore the IRS. If you owe federal income taxes and refuse to pay, you can be subject to liens, levies, seizure and, in some extreme cases, prison. Don’t lose control. There are a lot of opportunities along the way to make things right. Take advantage of them.